Maximizing Your Benefits: Should You Deduct 2024 Contributions from Your PER for Taxes in 2025?

Understanding the Retirement Savings Plan (PER) involves recognizing its tax implications and benefits. The PER allows for deductible contributions, which can significantly benefit higher-income earners. However, deducing contributions is optional, providing flexibility in tax planning. Taxation at retirement varies based on whether deductions were claimed, with strategies for capital or annuity withdrawals influencing tax liabilities. Low-income individuals may find limited benefits in deductions, while high-income earners are encouraged to utilize this tax incentive effectively.

Understanding the Retirement Savings Plan (PER)

As the year draws to a close, many financial professionals such as bankers, brokers, and insurance agents may encourage you to invest in or contribute to your Retirement Savings Plan (PER). Before making any decisions, it’s essential to grasp the tax implications associated with this financial product. Below are six critical points to consider prior to taking any action.

1 – The Mechanics of an Individual PER

The PER encompasses “various” types of plans! Within this single framework, two primary categories exist: employee savings (such as profit-sharing and incentive plans) and contributions related to your employer in the company PER. This can sometimes consist of two segments, alongside the investments you select for your retirement in the individual PER. The individual PER has effectively replaced the Perp and Madelin savings contracts, although the older plans can still be active.

The standout feature of the individual PER, similar to the Perp and Madelin, is the tax advantage that allows for the deduction of contributions. Provided you adhere to an annual limit, the contributions you make can reduce your taxable income, making these retirement savings plans particularly appealing for higher-income earners. Thus, the PER is a valuable tool for tax optimization.

2 – Is Deducting Contributions Mandatory?

No, it is not! This is a significant change introduced with the individual PER compared to the Perp and Madelin: the deduction is optional, even though it is the default setting. You have the option to forgo the deduction! To do this, you must notify the PER administrator at the time of setting up the plan or at the very least before making any contributions. Typically, you will need to check the box that states “I waive the tax deductibility of my contribution” for both the initial contribution and any subsequent scheduled contributions on the membership form. Once your funds are deposited, you cannot change your decision!

However, the choice between default tax deduction and waiving it is not entirely set in stone. You can opt for the deductibility of your contributions in one year and waive it in the following year when making another contribution. In this case, the PER manager will categorize the different amounts (those that were deducted versus those that were not) because the tax treatment upon withdrawal will vary.

3 – Who Benefits Most from the Deduction?

Your tax rate plays a crucial role in determining the benefits of the deduction. Put simply: the higher your tax bracket, the more advantageous the deductibility of PER contributions becomes.

As illustrated in the preceding table, the value of the “retirement savings” deduction varies significantly based on your marginal tax rate (TMI). Therefore, deducting contributions to a PER is most beneficial if you fall within the 30%, 41%, or 45% tax brackets.

4 – Taxation at Retirement with Deduction

capital withdrawal, all amounts previously paid into the PER will be subject to income tax when you withdraw them. This means you essentially defer tax liability, with the benefits enjoyed at entry balanced out by taxation when you access the funds. The gains accrued during this time will also be subject to capital income taxation (flat tax). To mitigate excessive taxation in the year you access your PER, consider spreading out withdrawals over several years during retirement.

Alternatively, you might choose the annuity withdrawal, which can provide you with a monthly income in retirement based on your accumulated savings. From a tax perspective, annuity payments from the PER are combined with your other retirement incomes and subject to the standard tax regime.

5 – Taxation at Retirement without Deduction

capital withdrawal, only the gains accrued from your contributions will be liable for the flat tax (which includes income tax and social contributions), meaning the capital itself is not taxed. In summary, this aligns with the tax treatment of most financial investments.

annuity withdrawal, it will be taxed more favorably than regular retirement pensions. The tax rules for life annuities apply here, meaning that only a portion of the monthly annuity will be taxable (30% or 40% based on the age of the recipient).

6 – Should You Waive the Deduction on Contributions to the PER?

As highlighted by the French government in autumn 2019 during the launch of the PER: “Those not subject to income tax can make non-deductible retirement savings contributions. Upon withdrawal, they will only be taxed on the earnings from their savings (capital gains).” Therefore, taxpayers who are minimally taxed or not taxed at all have no reason to deduct their voluntary contributions to a PER from their taxable income. By opting out of the deduction, they can particularly benefit from a favorably taxed life annuity during retirement.

For high-income earners (in tax brackets of 30%, 41%, and 45%), the tax incentive provided by the deduction is a compelling reason to open a PER and take advantage of the deduction.

For low-income households that fall into the 11% bracket, the benefits of the deduction are limited (for example, receiving only 110 euros for a 1,000 euro contribution). In this case, the option to “waive deductibility” should be carefully evaluated.